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Monday, September 30, 2013

Italy plunged into fresh political turmoil: End of the line for PM Letta?

UPDATE (18:15) - Silvio Berlusconi has just come out of a meeting with MPs and Senators from his party. According to reports in the Italian media, he has outlined the following roadmap: a quick vote on the 2014 budget and a couple more economic measures (Berlusconi apparently said this can all be done in one week), followed by snap elections.

Not sure this can represent a good basis for a potential compromise with Enrico Letta's centre-left Democratic Party - not least since Berlusconi's strategy seems to imply a return to the polls without changing Italy's controversial electoral law first. We explained in our original blog post from this morning why this could be a huge gamble. UPDATE (15:45) - Italy's Minister for Relations with Parliament, Dario Franceschini (from Enrico Letta's party) has just confirmed that the Prime Minister will address the Italian Senate on Wednesday morning and the Chamber of Deputies on Wednesday afternoon.

However, Mr Franceschini also stressed that a confidence vote after the debate is "very likely", but will ultimately "depend on how the debate will go". We think there are two possible interpretations here, depending on whether one wants to see the glass half full or half empty:

1) Mr Letta is still confident Berlusconi could backtrack on his plan to bring the government down;

2) If, based on the statements made by the various political groups during the debate on Wednesday morning, Mr Letta were to deem the confidence vote in the Italian Senate absolutely impossible to win, he may decide to skip it and tender his resignation straight away.

ORIGINAL BLOG POST (9:30)

For regular readers of this blog (see here, here and here), Silvio Berlusconi pulling the plug on Italy's fragile coalition government was just a matter of time - especially after his conviction for tax fraud. On Saturday, Il Cavaliere ordered ministers from his party to resign and called for snap elections.

The official reason for doing so was the Italian government's inability to scrap a VAT increase planned by the previous technocratic cabinet led by Mario Monti, due to kick in tomorrow. However, it would be naïve to see no correlation with the fact that Berlusconi is to be ousted from parliament within the next few weeks as a result of his tax fraud conviction.

So what happens next? The moment of truth will be on Wednesday, when Prime Minister Enrico Letta will seek a vote of confidence in both chambers of the Italian parliament. The key vote will be the one in the Senate, the upper chamber, where Mr Letta's centre-left Democratic Party does not command a majority on its own.

Scenario 1 - Letta survives the confidence vote in the Senate

Tough, but definitely not unrealistic. Letta needs around 20 Senators from either Berlusconi's party or Beppe Grillo's Five-Star Movement to break ranks and support him. Over the past few days, politicians from both parties have hinted at possible defections. Crucially, after tendering their resignations, four of Berlusconi's ministers have expressed reservations over their leader's decision to open a new political crisis at this stage. All this suggests Letta does have a chance of winning the vote in the Italian Senate, and staying in power with a different, albeit thinner, parliamentary majority (and after a rather substantial cabinet reshuffle).

However, this would only be a temporary fix. With his new majority, Letta could try and address a couple of urgent issues (a reform of Italy's tortuous electoral law and the budget for 2014 are the most obvious) - and perhaps plan for early elections at some point next year.

Scenario 2 - Letta loses the confidence vote

If Letta loses the confidence vote, he will have to resign. As we explained several times, the ball would then be in Italian President Giorgio Napolitano's court. Napolitano would have to hold talks with all the political parties and then make a decision: task Letta himself or someone else with forming a new government, or dissolve parliament and call new elections.

New elections in Italy can take place no less than 45 days after parliament is dissolved. The risks of a quick return to the polls are obvious. Voting again with the same electoral law may well lead to another inconclusive outcome - meaning that Italy could be facing a few months of political paralysis at a time when the country can least afford it. As if things were not complicated enough, the electoral law is currently also being examined by the Italian Constitutional Court, with a ruling expected in early December - and is at risk of being declared at least in part unconstitutional.

This is where we are at. Clearly, none of the two scenarios would provide the medium-term political stability Italy needs to get its act together - which in itself is not great news for both the country and the eurozone as a whole. Everything will depend on how Wednesday's vote of confidence goes.

3 comments:

Rik
said...

There is a big difference between reality and market's perception of reality on this issue.

What Italy needed and still needs is roughly a reform minded and reform capable government. It simply has that not at the moment. Letta effectively was a non issue from the start. Italy has a government (at least for a few more days) but one that was and is not able to deliver on the structural reforms required.From that perspective it hardly matters whether Italy has the Letta government or has no government at all.Basically similar with Monti in the last days of his government.At the end of the day nothing relevant will happen.

However market's perception of things is different. Markets earlier basically lowered yield requirements when Letta got appointed. Most likely therefor markets will be punishing Italy for this. Simply reverse the thing. Allthough the present government is basically totally useless anyway and always has been. And as such similar to having no government at all. A sort of Belgian situation.

Especially seen the fact that this brings Italy and the fact that it is not able to make the U-turn anyway back in the spotlight again. Furthermore even with new election hard to see where Italy would get a reform minded government (or even any majority government at all) from.Not only does it bring the issue back in the spotlight, but also makes it clear that Italy is not a modern Western nation, but still very much a bananarepublic. One with a dysfunctional, failed if you like, political system. Unfit for the challenges of the Euro crisis.

This oversimplifies considerably. There are not two alternatives, but X.

What is clear is that ex-Premier Berlusconi may well have miscalculated. By provoking a crisis, he has likely freed senators from any reluctance to exclude him from the Senate as a convicted felon. Given his age--77--that would likely end his political career.

What is less clear is how things go if Berlusconi's PDL members in fact defect to allow the government to continue. President Napolitano says he wants no "à la carte" government, which means that any new government will also have to outline its program and obtain approval for it in parliament-- fine in principle, totally up in the air in practice.

In short, Berlusconi may have shot himself in the foot, but the only exit other than new elections, which nobody wants, is full of uncertainty.